The minimum wage muddle

Once upon a time, there was a near consensus among economists that raising the minimum wage was a bad idea. The market is really good at setting prices on things, whether apples or labour. If you raise the price on a worker, employers will hire fewer and you'll just hurt the people you meant to help.

Then, in 1993, economists David Card and Alan Krueger looked at fast-food restaurants in New Jersey and Pennsylvania and found that raising the minimum wage gave people more income without hurting employment. A series of studies in Britain buttressed these findings.

Today, raising the minimum wage is the central piece of the progressive economic agenda. President Barack Obama and Mrs Hillary Clinton champion it. Cities and states across the US have been moving to raise minimum wages to as high as US$15 (S$20) an hour - including New York state just this week.

Some of my Democratic friends are arguing that forcing businesses to raise their minimum wage will not only help low-wage workers; it will also actually boost profits, because companies will better retain workers. Some economists have reported that there is no longer any evidence that raising wages will cost jobs.

Unfortunately, that last claim is inaccurate. There are, in fact, many studies on each side of the issue. David Neumark of the University of California, Irvine, and William Wascher of the Federal Reserve have done their own studies and point to dozens of others showing significant job losses.

Minimum wage workers often work at places that disproportionately serve people down the income scale. So raising the minimum wage is like a regressive consumption tax paid for by the poor to subsidise the wages of workers who are often middle class.

Recently, Michael Wither and Jeffrey Clemens of the University of California, San Diego, looked at data from the 2007 federal minimum wage hike and found that it reduced the national employment-to-population ratio by 0.7 percentage point (which is actually a lot), and led to a 6-percentage-point decrease in the likelihood that a low-wage worker would have a job.

Because low-wage workers get less work experience under a higher minimum wage regime, they are less likely to move to higher-wage jobs down the road. Wither and Clemens found that two years later, workers' chance of making US$1,500 a month was reduced by 5 percentage points.

Many economists have pointed out that as a poverty-fighting measure the minimum wage is horribly targeted. A 2010 study by Joseph Sabia and Richard Burkhauser found that only 11.3 per cent of workers who would benefit from raising the wage to US$9.50 an hour would come from poor households. An earlier study by Sabia found that single mothers' employment dropped 6 per cent for every 10 per cent increase in the minimum wage.

A study by Thomas MaCurdy of Stanford built on the fact that there are as many individuals in high-income families making the minimum wage (teenagers) as in low-income families. MaCurdy found that the costs of raising the wage are passed on to consumers in the form of higher prices. Minimum-wage workers often work at places that disproportionately serve people down the income scale. So raising the minimum wage is like a regressive consumption tax paid for by the poor to subsidise the wages of workers who are often middle class.

What we have, in sum, is a very complicated situation. If we do raise the minimum wage, a lot of people will clearly benefit and a lot of people will clearly be hurt. The most objective and broadest bits of evidence provoke ambivalence. One survey of economists by the University of Chicago found 59 per cent believed that a rise to US$9 an hour would make it "noticeably harder" for poor people to find work. But a slight majority also thought the hike would be worthwhile for those in jobs. A study by the Congressional Budget Office found a hike to US$10.10 might lift 900,000 out of poverty but cost roughly 500,000 jobs.

My own guess is the economists will never be able to give us a dispositive answer about who is hurt or helped. Economists have their biases and reality is too granular. It depends on what region a worker is in, whether a particular job can be easily done by a machine, what the mindset of his or her employer is.

The best reasonable guess is that a gradual hike in high-cost cities like Seattle or New York will probably not produce massive dislocation. But raising the wage to US$15 in rural New York will cause large disruptions and job losses.

The key intellectual upshot is that, despite what some people want you to believe, the laws of economic gravity have not been suspended. You can't impose costs on some without trade-offs for others. You can't intervene in the market without unintended consequences. And here's a haunting fact that seems to make sense: Raising the minimum wage will produce winners among job holders from all backgrounds, but it will disproportionately punish those with the lowest skills, who are least likely to be able to justify higher employment costs.

NEW YORK TIMES

A version of this article appeared in the print edition of The Straits Times on July 29, 2015, with the headline 'The minimum wage muddle'. Print Edition | Subscribe